Monday, June 15, 2015

"Greek Default Does NOT Equal Greek Exit!"

It seems timely to reproduce below an article which FinMin Varoufakis had published in his blog on February 18, 2012: 

"Perhaps the greatest enemy of the eurozone, at this particular juncture, is an erroneous assumption: that a Greek default is inextricably linked to a Greek exit from the eurozone. The problem with this assumption is twofold: First, it prevents Europe from escaping a trap of its own making. Secondly, it is false.

By now, reasonable people realise that the Greek Bailouts do not work. Even though the Greek government (its overall incompetence notwithstanding) has managed to reduce its primary deficit by a whopping 9% (at a time of bitter recession), a loan package worth €240 billion (even if the debt write down known as PSI is successful) will have failed to arrest the steady rise of the  country’s debt and the inexorable shrinking of its national income. It is, thus, unsurprising that the EU and the IMF are at the end of their tether. The show can’t go on (with more loans that demand GDP-killing austerity to pacify the Northern parliamentarians who must approve them).

At the same time, the notion that Greece ought to leave the eurozone is unfathomable: while almost everyone would prefer Greece to have been outside the eurozone, the actual cost of severing Greece will prove equal to that of dismantling the eurozone itself painfully, slowly, catastrophically.

The two thoughts above cause Europe to behave like Buridan’s Ass. Meanwhile the eurozone, as a whole, is moving further along the path  of disintegration and generalised recession. However, this indecision and impasse is founded on an error: the fallacious presumption that Europe is constrained to choose between the bailout route and Greece’s exit. But there is a third way which is less costly for all and gives Europe a chance, at long last, to design a new path out of the Crisis not only for Greece but for all deficit countries (as well as of the ailing European banking sector): Greece must default within the eurozone!

The Greek state, let me remind you, is quite close to a primary surplus. With judicious top-down reductions wages and pensions, plus the issue of tax-bonds, the Greek public sector could finance itself for the foreseeable future. All that is needed is that the ECB continues to provide liquidity to the Greek banks. Some say that it cannot do this because it won’t be able to accept Greek government bonds as collateral (since the Greek state will have defaulted). True but irrelevant: Greek banks have already posted whatever government bonds they owned with the ECB for collateral. That creek has dried. Nowadays they are posting domestic mortgages and other such paper titles (which are, by the way, no worse in quality to those posted by Italian and Spanish banks). All that it would take to allow Greece to stay in the eurozone, in a better state than it is today (and less austerity for that matter), is the continuation of the present ECB policy toward Greek banks. As for those who argue that the ECB will take an aggressive stance, think again: the ECB will not knowingly take steps which will destroy the eurozone.

Naturally, while a defaulted Greece can easily (and optimally, under the present constraints) remain in the eurozone, a long term resolution of its insolvency will have to be plotted by Europe. But is that not the case anyway? Is it not time that Europe deals with the various insolvencies in its midst, rather than continue to push their under the carpet (like a spolit 5-year old)?

To conclude, Europe’s optimal strategy is to let Greece default, to allow the Greek government to find ways to live within its tax take for the next year or so and, at the same time, work out the Overall Solution to the euro crisis that was promised last year and never delivered. A Greek default will provide the clarity and the time-space to do this properly. The other two alternatives (more bailouts or a Greek exit) constitute cruel, unnecessary and unusual punishment. For the whole of Europe."


  1. Kleingut

    Do you think there could be a connection between the timing of the negative devlopments in Greece current account and the timing of the Euro ELA.

  2. No, unfortunately.

  3. I was thinking that posssibly more readily available funds in that quarter may be assosiated with spending on imports in that quarter.

    1. Liquidity leaves the banking system in several ways, for example: cash withdrawals, transfers abroad or, of course, current account deficit. I think the current account deficit was the least of all problems of the Greek banking sector this year.

    2. My information from Athens is that many businesses are withdrawing their entire account balances in cash on Fridays, and returning them to the bank on Mondays. This is the first time that this has been a common practice, indicating the level of crisis and lack of confidence in the banks. People need to use the banking mechanism for their businesses, but they are afraid to leave any money in the accounts.

      If this is true, then the liquidity issue is perhaps less about money leaving the country and more about public confidence in the stability of the banking system. That should be a priority for the Troika and Syriza -- but as they are set in conflict they ignore it.

  4. Mr. Kastner,

    You posted but without comment. Do I assume that this is where you believe we are now or leading to?

    You never post something without some explination so i assume your post speaks of itself. hence exit within the euro zone?



    1. Well, I think I have said often enough that I believe that this is Varoufakis' plan: default but hold on to the Euro. Thus, no further comment.

    2. At this point, it is a possibility. But if you ask SYRIZA to do the cuts they are asking and you expect them simply to say "yes", it means that you don't know what SYRIZA is...

      For what matters, prof. Milios, who is SYRIZA member, but didn't run in the elections, probably because he was promiced to become EU Comissioner, but Tsipras had to leave Avramopoulos in place after pressure of EPP, wrote an open article sustaining that Greece should have already defaulted on her payments. Milios is considered to be antagonistic to Varoufakis and before the elections everyone was certain that he would take an important ministry. It is also noteworthy that Milios is part of the milder SYRIZA wing, he has published a proposal on creditor-friendly debt restructuring.

      To make a blunt comparison. When you ask from SYRIZA to cut 3,6 beur every year between pensions and VAT, it is like asking Ronald Reagan to make a donation to Fidel Castro. Well, if you put a gun on his head, he may agree to it, but only if you put a gun on his head.

  5. Mr. Kastner,

    I am under the impression that the "Alexis Speech" you posted a few weeks ago as an article is coming.



    1. That would immediately put him into history books forever. And the EU would feel the rest of the world staring in their faces with moral imperatives.

    2. Gentleman Kastner,

      I find you to be a good man with wisdom and sincerity. Regardless of your disapointments in us I thank you for your efforts, courage and concern. Truly. It has always been my pleasure to read your thoughts even if i disagree sometimes.

      Truth be said at the end of the day even if we greeks and eu (everyone) would like to tell each other to "kiss off," it will be a sad day when we leave the family, even if it has been hectic for both us and everyone else. In the end, you do not need to have a label to be considered european.

      I am disapointed in all politicians. Europe is full of good people but i guess we have deeper diferences than we care to admit. At least greeks.

      Maybe if we do leave it will be for the best. If we do as you stated, the naughty kid will need to take on his own responsibilities.


    3. Yeah, it is sad.
      It looks like all parties follow a modell of game theorie.
      But not the game of chicken but rater the ultimatum game.
      And empiry shows that in ultimatum games many people say "If I get less than 30% or nothing and you get more than 70% or nothing, I prefer nothing than an unfair minor part of the money."

      Additional problem: There are so different views on the negotiations that there are very strong differences about where would be a fair 50/50 deal.
      And there grew a deep loss in trust that we can see in this forum as well: Antoinette seems to be phenotypical for many Northern Europeans deeply distrusting the Syriza Government, Xenos seems to be phenotypical for Greeks deeply distrusting European lenders, assuming a badminded German conspiracy behind every move.

      By the way: I do not thing the shame has to be given more to politicians than to the people.
      Greeks voted for parties that demanded a much tougher stand on negotiations (away with troika) - and the government delivers exactly that.
      In Northern Europe many people as well demand a tougher stand on negotiations, otherwise actual governments face to loose elections against tougher negotiating parties and governments. So they also deliver a quite tough stand.
      The people elect the politicians they like to represent them. For me it is too easy to blame the politicians if the people elect that way.

    4. Hi Roger,

      I agree with your points and in light of your last paragraph, stances change do to reprucations of economical environmental factors. Greeks have been voting for the pro europeon parties for 5 years now and only brought further distress. I will acknoledge that some good did come from this crisis as we must always see the good even in the bad. But the bads that came out of this are extremely bad.

      Ofcourse i understand considerably that which you state about tough stances otherwise your electorate will select parties with even more stronger stances. Germany as a whole is not doing that great. Sure great surpluses, exports machine and tons of industry, but who is gaining from all of this? Meanwhile in the early 2000 Germany put austerity on itself as to become the european leader. The everyday people of Germany have every right not to help the everyday people of Greece.

      When both sides of people know and understand this, this is a basis for the future. Whatever future this might be.


    5. "Germany as a whole is not doing that great."
      That is another point. There is not the feeling of "Oh, we can easily afford paying for Greece all the time as we have no other serious problems" but more like "Oh no, if we continue paying Greece other countries will demand the same and that will definitely overburden Germany and all other paying countries in Europe, coming to a big bang. So there are seen few alternatives to a tough line right now.

      Personally I suppose the direction of the proposed offer of Klaus Kleingut, ( ) could be a reasonable way for Germany as it definitely means "no more new money up from now". But I dont know how it would be seen by Eastern Europe, Spain and Portugal. And how it would be seen by Syriza, of course.

      "When both sides of people know and understand this, this is a basis for the future. Whatever future this might be."
      I am quite pessimistic.
      I suppose the economic future will be more rocky than the present for many or all European countries, as the Asian economical concurrence is still rising, and Europe is still quite expensive in comparison.
      I suppose, that may further increase the tensions and stresses, between nation and inside of nations.

      I hope the rising tensions will not end in new wars, as we see them actually everywhere in the Arab world and the Ukraine.
      But I dont know as in the eighties I would not have expected, which brutal wars would arise in Yugoslavia. Or now in Ukraine.

      And I really cannot imagine which way Greece will choose to go. There are many chancec, but also many traps.

    6. Roger My Friend,

      All very good points of discussions and complete understanding of the above. What i would like to point out though.

      "I am quite pessimistic."

      This is where i would like to encourage you not to be. You are well mannered thinking person and Citizen of Germany and EU. As i am of Greece and EU. What differences do the day to day people of europe have between each other. Very little and even though we are very different. We all would like jobs, sustain our families and have some enjoyment in life. We also enjoy each others cultures. It is the idea of Europe which i love. What i do not love is the misinformation and the stubborness of politicians (greeks inclusive) to old ideas.

      I will also not get into the details which are coming out everyday of the greek debt problem. Of how the USA bank bail outs overflowed on Europe and hurting weak economies hence putting bad debt on major european banks. And rather making refinancings As Mr. Kastner has suggested, which could have helped in 2012 a great deal, were buried under th rug for the nice ponzi scheme to be formed, meanwhile labeling all greeks as lazy free loaders.

      I can look beyond that even it weighs my society and in turn weighs down your society. I can look beyond that because in truth greece did indeed need reform. Greece's people needed a wake up call from the economical dream land that they lived in. It came and with a hard price.

      Whatever the aftermath is to take place and truly and honestly I hope that Syriza does what is best for Greece and Mrs. merkel does honestly and truly best what is good for Germany. The aftermath will not change my opinion on the greater majority of my fellow europeans. The majority are good people whom i like and enjoy their company.

      I am flip flopping from which is best for Greece, but whatever happens what i have gained afer the crisisis my loss of fear. After being bombarded with media terrisization, i do not fear anything anymore. I will do what is best for my country meanwhile maintain the old image of what really is good greek character.

      This is why am I am not pessimistic. And you should be either. Because our hard stance and Germany's hard stance will either end up for a good agreement for both or a break in Greece from the eu. In both instances it is good for both of us as it will mean they will take responsibility for their actions. (I hope they do this one way or an other without the IMF, because this is a European problem not a USA subsidiary problem.)

      Best Wishes From Greece,

    7. Dear V,

      thank you very much:-)
      I agree with most of you.
      And I still hope for an result like in this movie:
      If not - lets stay with respect and honesty, not with hate and disgust.

      Best wishes brack from Germany.

  6. If Tsipras do not accept a proposed difficult agreement (with no debt relief) and decide not to pay IMF- or if there is a possibility later not to pay the ECB- what the Austrian MP, people in general, think?
    There will be a cool approach to keep Greece in euro but with much harder memorandum or the opposite?
    Personal view: Are Germans and co ready to propose a difficult road map for Greece with reforms in exchange for debt relief, but also with implementation from Greek side of Junger plan at 80%?


    1. To MS June 16, 6:39 PM

      Dear sir,
      If Tsipras defaults on July 1st, i think it is fairly certain to assume that he will default not just on the IMF payment, but also to the ECB payment. I think it is also reasonable to believe that the ECB will "strike back" at him on July 1st, to force Tsipras to handle a cypriot like scenario. Yesterday in greek press, i read an article from german newspaper, where allegedely there is already a plan to "punish" Tsipras already on June 27, by asking him to impose capital controls.

      I think Tsipras will have very little money to make more payments and once the horns of war has sounded, i think it would be impossible for SYRIZA to accept a worse deal. SYRIZA would either resign and pass the goverment to...a coalition of ND,PASOK,River or go to elections with the question: "us and drachma or them and submission to Germany".

      The big question, is how the population will react to the capital controls. 2-3 years ago, it would be easier to predict. But today, the situation is unique, because 1) The population is tired of being saved and always end up in Grexit , 2) Tsipras is powerful with very high popularity, 3) The opposition in Greece is in a complete disarray and incapacity to handle Tsipras.
      - New Democracy, despite in many Greeks there is for months a worrisome feeling of whether or not SYRIZA knows what's it's doing, in polls only gained 1% and is still 12% behind SYRIZA. And this will not change, until they change Samaras for someone much younger, who has no sins of the past on his back. New Democracy, moreover, isn't the party that will gather its voters and go siege the parliament.
      - PASOK, the once powerful, has attempted to revamp itself, by phasing out Venizelos, for another leader coming from the sinful PASOK, Fofi Genimata. Euthanasia would be a much more realistic solution.
      - River: The party that is the obvious answer to fill the gap from PASOK's demise, but despite being "new", is stuck to 6%. It's main problem is a) the way and timing of its appearance, b) the heterogenous composition of its various members, ranging from Democratic left refugees to hardcore liberals, c) the fact that revolves around its leader, who being a tv journalist, is seen with suspicion for his ties with former greek PASOK politicians and media owners.
      - KKE is living as always in isolation, accusing SYRIZA for backpedaling on its already meagre Thessaloniki program.
      - Golden Dawn is banned from media and still entagled in their trials.

      So the landscape in the opposition, is almost ideal for Tsipras to operate with maximum confidence.

  7. An interesting question on prof. Varoufakis' theory, is whether or not his plan is feasible. In other words: 1) Will the ECB act the way he thinks he will? 2) How long for can an economy go on like that, 3) How long for will the population support SYRIZA in such a strategy (this i think it the most crucial, but also the most difficult to answer).

    According to newspaper articles, circles close to Stournaras, say that the opinion of Stournaras is that "defaulting and staying in the euro is impossible".

    On the other side of the map, these where the positions of eminent SYRIZA MPs in yesterday's assembly:
    - Kalivis: He asked Tsipras to address the people and say "Our choice is the euro, but Grexit isn't a disaster".
    - Prof. Lapavitsas: "If the pressure by the creditors continues, we must see a plan for coordinated Grexit".
    - Leoutsakos: "There are multiple exits. In a crisis there are difficulties, there no only ways. Our own proposals aren't in the context of our electoral program. We must tell the people that we do have an alternative way".
    - Minister Isihos: "The negotiations aren't over, but they aren't in their best point either. We may yet find a solution. The institutions should agree on what they want each of them and what they want all together".
    - Mitropoulos: "The negotiation is lost, we have bad results, because we had no comprehensive plan. Mistakes were done by the negotiators and so we went to the February 20 deal. However, we must insist in avoiding the rupture and in searching for a solution until the very end, so to have the least painful solution possible.
    - Minister Skourletis: Our super-weapon is our EZ membership. What we had said since the beginning, that after us, more are following. But this must be tested and tested until the end. Basic defense line for us, is the debt".
    - Minister Lafazanis: "We don't have a deal, with the exlusive responsibility of the creditors. They are not negotiating. They ask for soil and water. Complete submission and plundering. The goverment has made it clear that the country isn't a protectorate and is not willing to sign the annihilation of the population. We have a proposal-framework compatible with our program, that will provide an exit from the crisis and a growth prospect".

    Note: Mitropoulos is former PASOK MP, professor of constitutional law, who jumped to SYRIZA after voting one time too many for pension/wage cuts with PASOK. He also forgot to declare a 1.000.000 euro fee for services abroad.

  8. @kleingut.
    I have no knowledge of Mr. Tsipras intentions regarding fuel smuggling. I can only take his promise to eradicate it at face value. I do not find it very honorable that he demands a ransom for that promise.